Better Than Expected Third Quarter Earnings Lift Hartford’s Stock

Hartford Financial’s (NYSE:HIG) increased focus on its property and casualty (P&C) insurance and group benefits businesses were reflected in its recent third quarter results, with better-than-expected earnings lifting the stock price by about 3% on Tuesday. The company reported a 15% year-over-year increase in core earnings, driven by improvements in P&C underwriting and an increase in income from limited partnerships and other investments. ((Events & Presentations, Investor Relations)) Net income increased by a solid 32% year-over-year to $388 million. ^[1]

We recently restructured our model to account for changes in the company’s business structure. In our model, P&C insurance (consisting of the commercial and consumer segments as well as investment income for the division) accounts for 85% of the company’s value.

We have a price estimate of $42 for the company’s stock, which is about 10% higher than the current market price.

See our full analysis of Hartford Financial here

Property And Casualty Insurance

Ever since the divestiture of its life insurance business, the company has been focusing on improving the distribution channels, operating efficiency and customer experience in the P&C division. ^[2] Written premiums from the division increased by 2% year-over-year, driven by commercial and consumer premium growth of 1% and 3%, respectively. On the back of an improved underwriting performance and higher net investment income, core earnings were $353 million compared to $263 million a year ago. The combined ratio (ratio of claims to premiums) saw a strong improvement from 96.2% in the third quarter of 2013 to 91.4% in 2014. Lower catastrophic losses and favorable prior year development reserves resulted in a better combined ratio this quarter.

Commercial

The combined ratio for the commercial P&C segment was 90.4% compared to 98.1% a year ago due to favorable prior year developments, lower catastrophe related losses and a lower loss adjustment ratio. This followed the trend of generally improving underwriting profitability for Hartford in the segment over the past few quarters, as the company has invested considerable resources in updating its underwriting tools. ^[2]

Consumer

Premiums in the consumer P&C segment rose on account of increases in pricing, premium retention and new business growth. Premiums from the American Association of Retired Persons (AARP) direct and agency increased 5% year-over-year. The combined ratio (excluding catastrophe losses and prior year development reserves) improved from 91.1% to 89.4% in the third quarter. This resulted in a 4% year-over-year jump in core earnings of $71 million.

The consumer auto insurance business recorded a 3% year-over-year increase in written premiums, aided by growth in new business, a 5% rise in renewal written premium rates and policy retention of 87%.

Meanwhile, an improved combined ratio, a renewal written price increase of 7% and policy count retention of 86% boosted homeowners’ insurance written premiums by 3% over the previous year.

Group Benefits

Group Life insurance constitutes around 13% of our valuation of the company’s stock. Improved group life and disability results led to a 6% year-over-year increase in core earnings. ^[3] The group life loss ratio improved from 74.8% last year to 72.9% in the third quarter of 2014. Price increases helped disability loss ratio decline to 85.7% from 87.9% a year ago.

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1. 3Q14 Financial Results Presentation , Investor Relations [↩]
2. The Hartford Financial Services Group’s (HIG) CEO Chris Swift on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩] [↩]
3. SEC 10-Q Filing [↩]